What type of entity is right for you?
Becoming a business owner? Congratulations!
Let’s start with what you are trying to accomplish to determine what type of entity is right for you. The structure of your entity will be affected by your business’ method and rates of taxation, how many owners will you have and what type of ownership, record keeping, and even the lifespan of the business.
Limited Liability Company (LLC)
Depending on the elections made while establishing your LLC such as the number of members, the IRS will treat an LLC either as a corporation, partnership, and/or as part of the owner’s taxes. Because the IRS does not recognize an LLC, the LLC can then be taxed as a C Corporation, S Corporation or Partnership. In contrast to a Sole Proprietorship, an LLC, Corporation and Partnership can separate your personal assets from the assets of the company, however, in the case of the Corporation or Partnership, you will be required to file 2 separate tax returns: one for your business and one for your personal taxes.
A partnership is a formal arrangement by two or more members to manage and operate a business and share a percentage of its profits and liabilities.
One of the biggest benefits of this business arrangement is that it is a flow-through entity. Therefore, any income generated in a partnership is treated as the personal income of the partners. This means it is only taxed once. In contrast, owners of a C Corporation face double-taxation. This is because the corporation’s income is taxed once, and then the distribution of income is taxed as a dividend to the individual.
There are different types of partnerships and each has it own advantages and disadvantages. If you’d like to learn more about General Partnerships, Limited Partnerships or Limited Liability Partnerships, please reach out to us to discuss further.
Considering a change?
With the prior implementation of new tax laws, many business owners made a change to their entity structure to take advantage of the reduced corporate tax rate. While this is enticing, keep in mind that corporations are double-taxed; first on the profit at the corporate level then second on the money pulled out as the company dividends. Know the choice to make a change isn’t always cut and dry. Potential benefits and disadvantages depend upon your income level among a number of other unique facts.